The outlook for leveraged finance in the mid-market – Part 2

Bill Troup, Managing Director, Debt Advisory at Livingstone, chaired a recent roundtable hosted by Livingstone and the law firm Reed Smith, where we gathered together senior figures from banks, direct lending funds and private equity investors to assess the current environment for leveraged finance.

The market has changed. The clearing banks and the debt funds are accommodating each other…

“The liquidity that is necessary in a normal leveraged loans market can’t just be provided by the traditional bank lenders,” said one senior corporate banker, “so we need direct lenders to make the market work.” Referring to recent transactions where credit funds and banks have jointly underwritten unitranche loans, on a first loss, second loss basis, “we are partnering with several of them on transactions. We will co-exist, and the market will develop.”

“Our relationship with banks is that of a classic frenemy,” said one direct lender. “We look at them both as partners and competition although fundamentally, it’s more about being partners. We can co-exist quite easily alongside each other. The debt funds do offer something different – and that is frequently dictated by the client who wants more flexibility and higher leverage.”

…and they need to get to know each other better

One participant described how his bank had already partnered with debt funds on deals, and emphasised the importance of developing an effective working relationship. “We have rehearsed post-deal scenarios with them in order to understand how they would respond if and when things did not go as planned.”

“Rehearsing is one thing, but there are lots of debt funds,” observed one banker, “and it remains to be seen how they will behave when things don’t go as planned.”

Read here to find out whether they thought we are near the top of the market.